Appraisals and Valuations

Freddie Mac finds appraisals in minority areas fall short

Freddie Mac analyzed five years and 12 million purchase applications

Appraisals in Black and Latino neighborhoods are more likely to fall short of the contracted sale price, a Freddie Mac study of 12 million appraisals found.

The research examined appraisals for home purchases the government sponsored enterprise received from 2015 through the end of 2020. While only 7% of appraisals undershoot the contracted sale price in census tracts where at least half the population is white, that percentage is much higher in minority tracts. The share of homes appraised below the sale price was greatest in Latino census tracts, where 15% of appraisals came in shy of what borrowers were wiling to pay. In Black census tracts, 13% of home appraisals failed to reach the contracted sales price. In tracts that were more than 80% Black or Latino, that proportion grew even larger.

When a home appraises below the contracted sale price, it gives the buyer an opportunity to negotiate a lower price. But when homebuyers face a gap between the amount they are willing to pay for a house and its appraised value, they often must weigh paying the difference out of pocket.

In normal times, that poses a problem for homebuyers with less savings on hand, or access to family wealth to help pay a larger down payment. In the current overheated housing market, where bidding wars are common and cash offers prevail, negotiating a price reduction in favor of the buyer is an unlikely scenario.

“An appraisal falling below the contracted sale price may allow a buyer to renegotiate with a seller, but it could also mean families might miss out on the full wealth-building benefits of homeownership or may be unable to get the financing needed to achieve the American Dream in the first place,” said Michael Bradley, senior vice president of modeling, econometrics, data science and analytics in Freddie Mac’s single-family division. “This is a persistent problem that disproportionately impacts hundreds of thousands of Black and Latino applicants.”

How Lenders Can Increase Minority Homeownership

This white paper outlines a new paradigm for how lenders can increase homeownership—especially to under-served and minority households—that is driven by opportunity and forward-looking, market-based opportunity data.

Presented by: iEmergent

The research found that the appraisal gaps resulted from a large portion of appraisers, a counter to the notion that a few isolated appraisers are responsible for the disparities.

Freddie Mac also sought to explain what could account for the disparities in appraised values. Researchers identified comp distance, comp reconciliation, comp variance, and purchaser overpayment as possible factors that lead to the differences.

The average distance between a home and the comps is substantially smaller when the property is in a minority tract than when it is in a white tract. Appraised values in minority tracts also tend to fall toward the lower end of the range of comparable appraised values — although the dollar difference is typically quite small.

One confounding factor could be minorities overpaying versus white buyers for similar properties. The research found that difference was “modest,” however, throwing cold water on that potential explanation for the disparity.

Researchers also examined whether neighborhood characteristics could explain the appraisal gap. That hypothesis, too, led to a dead end. Even when taking structural and neighborhood characteristics into consideration, a property in a minority tract is more likely to receive an appraisal lower than the contract price.

Bradley said the research is the first step to better understand the factors that contribute to the appraisal gap.

“Our goal is to develop solutions to this persistent problem, including appraisal best practices, uniform standards for automated valuation models, enhanced consumer disclosures, improved value processes, and revised fair lending exam procedures and risk assessments,” Bradley said.

Those representing the appraisal industry agreed with Freddie Mac that more research is needed to understand disparities in appraisals. Even so, Rodman Schley, president of the Appraisal Institute, which represents appraisers, countered that unconscious bias is not unique to appraisals.

“Appraisal is one piece of a larger ecosystem, and appraisal groups are working alongside consumer groups, real estate brokers and agents, banks, government agencies, think tanks and others to explore where housing inequities may stem from and what combination of solutions should be considered,” said Schley. “What is important is understanding, knowledge and guidance on how to recognize and interpret it when it occurs.”

Schley emphasized his organization’s efforts to diversify the industry, which is overwhelmingly white and aging.

“Diversity, equity and inclusion in appraisal is a top priority for the Appraisal Institute, and we take that responsibility seriously,” Schley said.

Mark Schiffman, executive director of the Real Estate Valuation Advocacy Association, which represents appraisal management companies, called Freddie Mac’s findings “troubling” and said the research reinforces the need for more data and analysis.

“We support their continued research, along with the other important data collection and stakeholder engagement activities underway, to determine the root causes and identify impactful solutions,” Schiffman said.

The Appraisal Subcommittee, a federal entity that has oversight authority for state licensure of appraisers, did not comment on Freddie Mac’s research.

One obstacle in addressing appraisal bias is a lack of widespread formal complaints alleging discrimination. The Department of Housing and Urban Development has received only a handful of such complaints in recent years.

In July, HUD announced it would spearhead an inter-agency appraisal task force, which will deliver a report to President Joe Biden within six months to describe the extent, causes and consequences of undervaluing of properties.


  1. Please! How about looking from the other direction? Maybe those appraisals of properties with a more diverse population are overblown? Ever consider that? Appraisers showing their bias by over-appraising properties in their “preferred” neighborhoods. Any time the distance between comparable is larger, that implies a more “selective” purpose in the search. I have been in this business for almost 40 years. I have seen examples of this for the entire time when reviewing others’ work.

Load More Comments

Leave a Reply

Your email address will not be published. Required fields are marked *

Most Popular Articles

3d rendering of a row of luxury townhouses along a street

Log In

Forgot Password?

Don't have an account? Please